Imbalances and determinants in financing low carbon transition: An analysis of emerging economies in Asia

Transition centered on innovation and application of low carbon products to establish a sustainable environment requires financial support. However, as the core component of a low carbon energy system, have renewable energy technologies have been experiencing imbalance in the overall transition process across countries and private investment categories. Research evidence provides rational to assume balanced private investment in renewable energy will positively influence environmental sustainability and the global economy. Thus, in order to shed light on the policy perspective, this paper establishes a stochastic frontier model to identify the determinants of private investment in renewable energy based on the profit theory of investment.

By empirically estimating data for 18 emerging economy countries in Asia, the estimation results show a significant positive effect on the risk premium of country-specific low carbon risks and macroeconomic risk, political risk, trade openness, and the business environment. The simulation analysis indicates that emerging economies in Asia, have realized their low carbon renewable energy in potential, reasonably well. Among the emerging economies of Asia, China is the only country that has realized its RE private potential of 86%. Among developed countries in Asia, Japan and Korea are the two countries that have realized 90% of their low carbon potential. A majority of the Association of Southeast Asian Nations (ASEAN) member countries have realized between 60% and 80% of their potential renewable energy private investment. Thus, it is imperative to eliminate, if not reduce, the perceived low carbon and other related risks in private investment and the role of governments in tailoring appropriate macroeconomic policies. For example, a 1% increase in the regulatory framework of a country, which is proxied by the variable of days required to start a business would reduce private investment by 1.18%. Thus, countries with an unfavorable business environment and with stringent rules and regulations would be less successful in attracting private investment.

The results suggest feasible approaches to eliminate perceived risks associated with the renewable energy sector are essential. Government can play a role in adopting a more open trade policy, providing a more friendly business environment for investors, encouraging innovation by establishing green investment banks, reducing taxes on low carbon energy investment, and stimulating green investment in financial markets. In addition, regional and international cooperation is another solution to the transition to low carbon energy systems by attracting financial and technological support.